Lender wants to tighten screws on default entrepreneurs
The state-owned Small Enterprise Finance Agency (Sefa) wants government to introduce cessions to forcibly recover loans from defaulting entrepreneurs.
the days of unscrupulous business owners deliberately ducking the repayment of loans to state-owned funding institutions are numbered. That is if government urgently heeds the plea of Thakhani Makhuvha, CEO of Sefa, who is lobbying for the introduction of cessions to forcibly recover loans from defaulting entrepreneurs who won’t pay up – even though their companies are generating enough revenue to cover their debt obligations.
“I am appealing to the politicians to consider introducing cessions to put an end to the problem,” Makhuvha told a packed SMME policy meeting attended by minister of small business development Lindiwe Zulu.
A cession is an effective instrument that protects lenders from ruthless borrowers because it forces borrowers to give up the rights to receive payments from clients to the lenders.
Payments from clients are paid to lenders first, then the lenders pay borrowers the balance after debt has been settled, eliminating the risk of borrowers vanishing into thin air without repaying their debt.
Sefa provides loan funding to small-, medium- and micro-sized enterprises (SMMEs) and cooperatives, a risky market shunned by the commercial banks due to a high default rate and businesses struggling to survive more than a year after birth.
That traditional lenders avoid this market is not without merit, given that money can quickly disappear into a bottomless pit – never to be seen again.
Because they have appetite to lend into this risky market, state-owned lenders suffer massive bad debt losses with 10% to 20% of their loan books going bad.
Sefa is not the only lender that has been at the receiving end of the growing culture of non-payment of loans, where borrowers prefer to purchase expensive luxury cars rather than honour their debt obligations.
Mncedisi Xego, founder and CEO of Royal Fields Finance, a lender that provides finance to small businesses and companies that have been awarded tenders, has found protective measures to deal with serial defaulters.
His company takes joint custodianship of the borrowers’ bank accounts so that when the money rolls in, Royal Fields takes what it is owed and the rest is paid to the borrowers. The company also uses cessions to hedge itself.
“Without this type of security, I doubt if any company would survive in this space. If you are lenient, that’s when people disappear and avoid paying the loans.
“The culture of non-payment is making it difficult for genuine entrepreneurs to access funding. The consequence is that a lot of financiers are insisting on collateral. This behaviour also pushes up the cost of funding to cover the cost of non-payment,” Xego explains.
He also argues that the non-payment culture is damaging because it has devastating consequences for capital-starved entrepreneurs who could be contributing strongly to job creation.
Despite the risks, the likes of Sefa and Royal Fields offer small businesses financing products such as bridging loans, term loans, revolving loans, and working capital.
“It is common knowledge that commercial lenders, banks in particular, are reluctant to extend financing to survivalist, small-, micro- and medium-sized enterprises and cooperatives. Invariably, these entrepreneurs and cooperatives are constrained by strict lending criteria set by banks in this market segment in view of the perceived risks inherent in the business ventures,” says Makhuvha.
In the case of Sefa, it provides loans up to a maximum of R5m and has appetite to provide funding to business owners operating in diverse sectors of the economy ranging from services (franchising, retail, tourism), manufacturing (agroprocessing), construction (small construction contractors) and mining (small miners) to green industries (waste and recycling management as well as installers or manufacturers of LED lights, solar geysers and heat pumps).
In the past financial year, Sefa disbursed R1.3bn, 74% of which went to black-owned companies.
The culture of non-payment is making it difficult for genuine entrepreneurs to access funding.